Global, local tobacco firms in brutal battle for market dominance

The growing popularity of electronic cigarettes, a universal lobby against tobacco use, even the legalization of marijuana in many parts of the United States and Europe; It’s enough to cause cigar and cigarette manufacturers to reconsider whether they should stay in the industry or move on to other lines of business.

A global brand like Dunhill, for example, has expanded to non-tobacco related products such as men’s apparel, leather goods and fragrances.

It is a grim joke that says smoking is a dying industry. In fact, the tobacco industry is alive and well in various parts of the world where smoking is not too frowned upon, like Japan, China, Cambodia or Cuba.

In the Philippines, while lobby groups—notably the Department of Health—have succeeded in giving a negative image to smoking, the cigarette industry is actually thriving.

The Ilocos region remains the tobacco-growing center of the country, and Ilocano farmers simply refuse to switch to other crops. Not when the per capita consumption of cigarettes by Filipinos is among the highest in the region.

Like his counterparts in such Asean countries as Indonesia and Malaysia, the Filipino smoker has not been turned off by the mandatory warning in cigarette packs that says smoking is deadly. The latest message says: “Government warning: tobacco smoke can harm your children.”

A previous warning said that smoking was hazardous to the smoker’s health. It is not yet known if the warning regarding the health of one’s children will have the effect that lobbyists seek, which is to ultimately eradicate smoking in all its forms worldwide.

In the pipeline is a proposed law that would place graphic images on cigarette packs, in place of worded warnings.

Furthermore, there is a permanent ban on tobacco advertising on print and broadcast media. This has forced the tobacco firms to resort to promotions where customers can win rewards, from as small as giveway lighters to brand new cars or trips abroad.

A country of smokers
Still, Juan de la Cruz must have his yosi. Cigarette smoking still goes hand-in-hand with his other favorite pastime, alcohol consumption.

According to the latest industry studies, the Philippines is the 15th biggest consumer of cigarettes in the world and the largest consumer among the Association of Southeast Asian Nations (Asean). An estimated 54% of adult men and 11% of adult women smoke, with overall adult smoking prevalence being the fourth highest among Asean countries.

Tobacco use among young Filipinos (18 years or less) is high, with some 37% of young men and 18% of young women smoking on at least a monthly basis.

From a purely business perspective, therefore, manufacturing and selling tobacco products like cigars, cigarettes, pipe tobacco and chewing tobacco makes perfect sense. There is a demand that is not expected to dramatically slide in the near future.

From ambulant vendors to sari-sari stores to convenience stores, sales of cigarettes along with alcoholic beverages and soft drinks continue to be strong and steady.

The tobacco industry is not only a multi-billion peso enterprise, it is also the principal source of livelihood for millions of Filipinos. Government statistics show that nearly three million Filipino farmers are dependent on the survival of the tobacco industry.

Including the tobacco farmers, the total number of Filipino workers and their families dependent on cigar and cigarette manufacturing and sales is estimated at 37.8 million.

Annual tobacco production in the country is pegged at P50 billion, of which P30 billion comes from tobacco leaves.

The multiplier effect from the downstream industries means that the Philippine economy will count on the tobacco industry as one of its pillars for many years to come.

A mighty challenger
Multinational corporation Philip Morris which operates in the country under the name Philip Morris Fortune Tobacco Corporation (PMFTC) seeks to continue manufacturing and selling cigarettes and other tobacco products for as long it remains profitable, but admits that it is bothered by what the company says is unfair competition coming from an upstart brand—Mighty cigarettes.

Philip Morris has reason for concern. After merging with taipan Lucio Tan’s Fortune Tobacco a few years ago, the new company became a virtual juggernaut, grabbing a heady 92 percent share of the market.

Today, however, that share has “shrunk” to 74 percent. In the last three years, Mighty ate Philip Morris’s share of the little noticed low end segment.

The rise of Mighty coincided with the expanded Value Added Tax on tobacco products, which saw the retail prices of cigarettes rise substantially starting last year.

Mighty claims that it has grabbed a healthy and growing market share because consumers simply switched brands. Not only is their flagship brand cheaper, it also tastes a lot like the upscale brands. So says a soon-to-be-appointed official spokesman of the company, who requested anonymity for the time being.

He did admit that Mighty was not beyond applying a time-tested marketing strategy of selling their products either at a loss or at break even point in order to corner the biggest possible chunk of the market.

Philip Morris says that Mighty’s “secret” is not that simple. The multinational tobacco company accuses the local firm of evading taxes.

In a statement to The Manila Times, PMFTC president Paul Riley said, “The current excise structure is not the issue. The issue is that a particular manufacturer appears to be non-compliant with those laws.”

Added Riley: “What’s important is that there is a level playing field for all, no matter what that is. The laws are in place and government’s direction is clear.”

Thus far, the 67-year old Philippine company that manufactures Mighty is Malolos, Bulacan-based Mighty Corp. The company has opted to remain silent on the accusations hurled its way by the MNC, only stating that they “pay all taxes due to the BIR.”

Mighty Corp. says that it is grabbing market share by creating a great tasting product at the lowest possible cost. Also, the company does not pay any royalties because all their brands are home grown.

Besides its best-selling Philip Morris brand and its variants, the US-based company also manufactures the Marlboro and Fortune brands and their multiple variants, among many others.

(A third major player in the local market is the British American Tobacco, which manufactures the brand Lucky Strike, which was relaunched in the Philippine market recently.)

PMFTC is not buying the Mighty Corp. claim, and has turned to the government for succor, specifically the Department of Finance and the Bureau of Customs.

Philip Morris claims that Mighty is depriving the government of between P4 billion to P5 billion in revenues every year.